The end of the year is upon us and it is a great time to review your IRA contributions. You’re allowed to contribute up to $6,000 to your IRA account ($7,000 if you’re over age 50) for the 2019 tax year. Moreover, you have until April 15, 2020, to contribute to your IRA. So if you have not yet made a contribution to your IRA for the 2019 tax year, you still have more than 3 months to do so. But if you have the means, you can use an accounting trick to contribute twice as much to your IRA accounts in 2020!
Contribute $6,000 twice
You can contribute $6,000 to your IRA for a 2019 contribution. And then, you can turn around and contribute another $6,000 and count it as your 2020 contribution. This means you can sock away $12,000 towards your retirement right at the beginning of the year! If you do this, be mindful of the way you make the contributions. You should not make one single $12,000 deposit into your IRA. As that would look like one lump sum of $12,000 and you can’t do that.
Instead, you should contribute $6,000 one day. And then contribute $6,000 on the following day. That way there is an electronic paper trail of two separate deposits. You’ll also want to make sure not to make the 2020 deposit until January 1, 2020. Because again, you don’t want it being perceived as a $12,000 contribution for 2019.
How to do it right
To recap, here is how you can contribute $12,000 total to your IRA instead of just the normal $6,000 contribution limit:
Provided you have not yet made any contributions to your IRA account for 2019…
- Deposit $6,000 to your IRA anytime between now and April 15, 2020.
- Keep a journal to log this deposit and make sure your tax preparer knows it is your 2019 IRA contribution.
- Anytime after January 1, 2020, deposit an additional $6,000 to your IRA.
- Keep a journal of the second deposit and note it as a 2020 IRA contribution.
- Make sure you do not make the deposits on the same day and make sure neither exceeds $6,000.
Lump-sum vs monthly
Obviously, not everyone has an extra $12,000 laying around that they can deposit into their IRA. But, those who do are best served to make a lump-sum deposit as opposed to following a monthly schedule. Lump-sum investing has been shown to provide better historical returns than dollar-cost averaging. Granted, some investors prefer dollar-cost averaging for psychological or budget reasons. However, if you can afford to make your total IRA deposit, the research suggests you should.
Year-end bookkeeping
As the year comes to a close, make sure you’re aware of your investment situation heading into 2020. This is a great time to review 401(K) accounts, eligible IRA rollovers, and use the tax laws to your advantage. With some simple accounting practice, you can actually deposit $12,000 to your IRA accounts over the next few weeks instead of the known $6,000. Imagine if you knew this last year, you could have earned the market’s 30% return on a $12,000 principal instead of $6,000. The difference would have been an extra $1,800 in profits.
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